The “Modern Monetary Theory”

“Modern Monetary Theory,” a doctrine about fiat money, has captured the attention of some reformers and progressives. This doctrine – a set of propositions contrary to logic and evidence – purports to explain why the US and other economies are ailing, but is beset by contradictions with the historic facts and within the doctrine.

For example, The New Inquiry on 11 April 2014 featured an article by Rebecca Rojer on “The World According to Modern Monetary Theory.” The author regards it as a revelation of MMT that the “rules of money are not immutable laws of nature.” Since the science of economics explains the effects of incentives and decisions, evidently these money “rules” are the outcomes of private and governmental decisions, and since the effects are not immutable laws, people can arbitrarily create whatever outcomes they wish. That would indeed be wonderful, to just print money are thereby eliminate unemployment, depressions, and poverty, all without creating price inflation, because the rules of money creation are not immutable, so we can have whatever outcome we wish!

Science is based on logic and evidence rather than “revelations.” It is possible that there have been revelations, but these create religion rather than science, since if an experience or experiment cannot be duplicated, the revelations are not sufficient for scientific warrants. Various religions have had different revelations, and the members do not believe the revelations of the others.

The author provides an example of the MMT doctrine. Suppose there is an island that has minerals. The owner of the mines hires workers and pays them with fiat money, like the paper and bank-account money we have today, i.e. money created out of nothing. But the owner also imposes a tax on the wages of the miners. So evidently this mine owner is a government, and we are not dealing with private enterprise, but a coercive socialist state. The miners work enough to both pay the wage tax and be able to survive.

But a premise of this MMT island example is that prior to the mining, the people were able to hunt and farm without working too hard. So why would anyone work in the mines? The historical explanation is the “enclosures” movement, in which land that was held by small-scale farmers or by villages was forcibly taken by the aristocracy or by the state or by foreign invaders. This is not a money story, but a land-grab story. Another way to get forced labor, other than chattel slavery, is to require the payment of taxes in money, which forces subsistence farmers to work on plantations at least long enough to pay the taxes. That is more a tax story than a money story, since if the government insists on being paid in coconuts, and a farmer does not grow coconuts, he must work on the coconut plantation, get paid in coconuts, and then pay the tax. Therefore the forced labor is based on the government’s restrictions on alternative employment opportunities.

MMT is correct in stating that one way that the government gets people to accept its fiat money is what economists call the “fiscal theory of money,” that the government reinforces its money as a medium of exchange by requiring the use of that money for paying taxes. However, if the government currency is being hyper-inflated, taxpayers would keep their savings in, say, gold, or a stable foreign currency, and then convert it to the fiat money only when a tax payment is due. The fiscal effect only works if the government is not creating too much inflation.

Therefore MMT is incorrect as stating, as a “core building block,” that forcing people to pay taxes with fiat money “gives it its value.” That was not the case, for example, in Zimbabwe, which suffered hyperinflation. One “immutable” economic law of money is that the creation of money, beyond what is needed for transactions, results in price inflation, and the payment of taxes becomes tied to that inflation, via the nominal rise of prices and wages, rather than preventing inflation.

A related fallacy of MMT is that “sovereigns” in general create money by “spending it into existence.” That can indeed happen, as for example in the Zimbabwe hyperinflation, but in the US and most countries today, government spending comes from taxes and borrowing, not money creation. The central bank, such as the Federal Reserve, does not create money by spending it for goods, but rather by buying bonds and then increasing the banks’ reserves or funds to pay for the bonds.

Since the “core” proposition of MMT, that price inflation can be controlled by government’s taxing and spending, is incorrect, the whole superstructure of the MMT doctrine built on it collapses. Actually, MMT does accept the proposition that monetary inflation creates price inflation, but that true proposition contradicts the core MMT premise that tax-paying gives money its value.

A worse MMT fallacy is that the taxes paid to the government destroys money. MMT tells us that governments create money when they spend, and then the money disappears when taxes are paid. But a tax no more destroys money than the dollars used to buy bread. The seller of bread now has the money, and the government now has the dollars paid in taxes, and they then spend that money.

There have been various theories and doctrines on money and banking in the history of economic thought, and in my judgment, the explanations that best fit the facts are a combination of the monetarist and the Austrian schools of thought. The monetarist core is the equation MV=PT, which explains that the quantity of money (M) multiplied by its annual velocity or turnover (V) equals the price level (P) multiplied by the amount of transactions (T) measured in money. Thus high price inflation, a rise in P, is usually caused by monetary inflation, an on-going increase in M.

The Austrian school explains how excessive monetary inflation not only cause price inflation, but distorts relative prices, such as when house purchase prices rise faster than rentals. Austrian theory shows how governmental central planning fails because the knowledge to do so well is always lacking, and that applies to money as well. Hence the Austrians propose free-market money and banking, so that the market sets interest rates and the money supply.

Indeed the Fed failed to prevent the Great Depression of the 1930s and the Great Recession of 2008, and its policies generated high inflation during the 1970s and the cheap credit that has fueled land-value bubbles. MMT cannot do any better, because, as the Austrian theory explains, the optimal money supply is not only not known, but not knowable. The pure free market provides the optimal money supply just as it provides the optimal amount of bread and the optimal amount of shoes.

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7 Responses to The “Modern Monetary Theory”

The comments and opposition to MMT within the Georgist community are well and good, but where is the conclusion written? Surely if money is created by banks to cover credit and savers in the bank (and others) can obtain loans that are backed by their savings, there is no more a shortage of money than before the economic crisis. Indeed with the introduction of bitcoin and similar electronic currencies, there is more opportunity for investment than ever before. Conclusion: the lack of progress in present day Western macro-economies is due to a different cause–land speculation and its non- or mis-use.

Fred – Thanks for some common sense logic. After more than 40 years of theoretically inspired monetary policy, one would have thought that most would have stopped relying on govt for solutions and recognized they are the source of our economic problems (including ALL the bubbles that the private sector and tax payer have bailed out).

Only a bureaucrat would believe that the govt’s only two solutions are to raise taxes or raid bank accounts. Unfortunately, as FATCA demonstrates, our govt is also full of people that don’t understand who ultimately determines where capital will flow and how.

I suppose some will go to their graves thinking govt will take care of them. Unfortunately, just as the Russian’s in eastern Ukraine that think Russia is going to save them, they will be bitterly disappointed…after it’s too late.

Pulling demand forward with increased debt and credit and hoping that growth can pay it back, even though debt/credit are growing faster than productive capacity is sheer fantasy. Debt and credit is not growth, and as Denninger explains (http://market-ticker.org/akcs-www?post=228987), QE has produced a “real” growth rate of -5.9%, which is more in line with what most people feel. For further study, I recommend Denninger’s book, “Leverage”, and his recommendation of “$1 Dollar of Capital” (http://market-ticker.org/akcs-www?post=209282).

I’ve had literally too many e-discussions with MMT co-founder Warren Mosler to condense into a comment box here, but I just wrote him again to ask if he wanted to comment in this space. Perhaps he will.
Zarlenga’s links provide a better MMT rebuttal than I ever could, but my main problems with MMT, as I’ve discussed with Mosler until we both grew tired of the conversation, are that:
1. MMT believes the FRB is part of the government, when legal, operational and historical evidence all indicate otherwise (that the government is institutionally captured by the FRB, and the banks in general, neither I, nor I gather, Mosler, disagree about). Believing this has all sorts of policy implications, including benign neglect or even approval of FRB measures that benefit the private banks more than the economy (if the latter benefits at all).
2. That all money is debt. It isn’t. See coins and U.S. Notes. See stamps (for a limited purpose). The first 2 are just “money” and accretive to the national account when produced, via seigniorage. MMT is correct, however, in saying that the government can never “run out” of money, and Mosler’s analogy to points in a football game is an apt one in this regard. This does not mean inflation is not a concern, and all MMTers acknowledge this.

Other things to consider:
Monetary Sovereigntist Rodger Mitchell has a wonderful little chart from the Fed that shows how recessions occur whenever government cuts deficit spending, going back to just after WWII, when it started keeping such data, and proving that gov’t spending is necessary to produce enough money to run the economy and promote growth. The private sector cannot do this alone, and is much more often responsible for bubbles than the government, which typically has to mop up the mess when they burst. However, a sovereign government ought to support debt-free money it produces itself, and thereby stop supporting a small ultra-wealthy class of rent-seekers.

BTW, Henry George supported debt-free Lincoln Greenbacks too, as both Zarlenga and I (on this site) have shown. Writing in The Standard, George said money creation ought to be the province of government not private banks.

Oh, and another thing. We could use the CBO’s calculation of the Output Gap to determine how much money government should spend, before we have to worry about inflation.
The CBO tells us this is now $1 trillion/year, since 2008, so nearly $6T altogether. That’s how much more we, as a nation, could have produced with existing labor, fixed capital, and of course, Land. The longer we wait to employ such labor, the more skillsets we will lose, maybe forever.
We cannot wait for the private sector to spend money into the economy which it really has no incentive to do, not when speculating on the QE fed and bailed out asset markets is so much more lucrative.

Folks,
If you want to understand MMT and its errors, (and you should!) you need to read Prof. Joseph Huber’s paper on it which went out to the 24,000 NON neo-classical economists of the Real World Economic Review in January. See http://www.paecon.net/PAEReview/issue66/Huber66.pdf
The American Monetary Institute also did a powerful critique of MMT, and you can read that at http://www.monetary.org/mmtevaluation
One of the main problems with MMT is their conclusion that the nature of money must be debt. In our mis structured system most money (except coins)is issued as debt, when banks make loans; but its a huge mistake to assert that the nature of money must be debt. That erroneous viewpoint makes it that much easier for the banking system, instead of the nation, to hold the MONEY POWER, since it dominates in credit and debt. And whoever holds the monetary power, over time, rules the nation.

The statement by Kristjan that “there is no need for private sector to hold government money” is puzzling. Money serves as a liquid asset, something people can readily spend, so individuals and firms will hold money. Also, money is more than a tax credit. It is also a “credit” (a claim) on all wealth sold. The US Treasury does not today create the money; it is created by the Fed and the banks, so the US government holds money just like anyone else, to spend. I may not understand MMT that well, but this letter has not made me understand it any better.

“MMT is correct in stating that one way that the government gets people to accept its fiat money is what economists call the “fiscal theory of money,” that the government reinforces its money as a medium of exchange by requiring the use of that money for paying taxes. However, if the government currency is being hyper-inflated, taxpayers would keep their savings in, say, gold, or a stable foreign currency, and then convert it to the fiat money only when a tax payment is due. The fiscal effect only works if the government is not creating too much inflation. ”

Yes, people can do that but government is always able to serve public purpose. that means goods and services that governmment needs move from private domain to public domain when governmment spends. in MT opinion there is no need for private sector to hold government money, It doesn’t serve any purpose. that is never a policy goal to have the private sector holding a lot ofd government currency. So your talk about private sector holding other assets and getting the money when taxes are due is pointless.

“A worse MMT fallacy is that the taxes paid to the government destroys money. MMT tells us that governments create money when they spend, and then the money disappears when taxes are paid. But a tax no more destroys money than the dollars used to buy bread.”

yo don’t seem to understand what this government money is. it is a tax credit7government liability. It doesn’t make any sense to issue liabilities to yourself and to hold liabilities that you have issued yourself. It makes perfect sense for the seller of bread to hold government liabilities. I suggest you start reading MMT since you don’t seem to understand anything about money and banking.

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Arts & Letters

Geonomics is …

about the money we spend on the nature we use. It flows torrentially yet invisibly, often submerged in the price of housing, food, fuel, and everything else. Flowing from the many to the few, natural rent distorts prices and rewards unjust and unsustainable choices. Redirected via dues and dividends to flow from each to all, “rent” payments would level the playing field and empower neighbors to shrink their workweek and expand their horizons. Modeled on nature’s feedback loops, earlier proposals to redirect rent found favor with Paine, Tolstoy, and Einstein. Wherever tried, to the degree tried, redirecting rent worked. One of today’s versions, the green tax shift, spreads out of Europe. Another, the Property Tax Shift, activists can win at the local level, building a world that works right for everyone.

a neologism for sharing “rent” or “social surplus” – the money we spend on the nature we use. When we buy land, such as the land beneath a home, we typically pay the wrong person – the homeowner. Instead, since land cost us nothing to make and is the common heri-tage of us all, rather than pay the owner, we should pay ourselves, our neighbors, our community. That is, we should all pay land dues to the public treasury, then our government would pay us land dividends from this collected revenue. It’s similar to the Alaska oil dividend, almost $2,000 last year. Indeed, the annual rental value of land, oil, all other natural resources, including the broadcast spectrum and other government-granted permits such as corporate charters, totals several trillion dollars each year. It’s so much that some could be spent on basic social services, the rest parceled out as a divi-dend, as Tom Paine suggested, and taxes (except any on natural rents) could be abolished, as Thomas Jeffer-son suggested. Were we sharing Earth by sharing her worth, territorial disputes would be fewer, less intense, and more resolvable.

the study of the money we spend on the nature we use. When we pay that money to private owners, we reward both speculation and over-extraction. Robert Kiyosaki’s bestseller, Rich Dad’s Prophecy, says, “One of the reasons McDonald’s is such a rich company is not because it sells a lot of burgers but because it owns the land at some of the best intersections in the world. The main reason Kim and I invest in such properties is to own the land at the corner of the intersection. (p 200) My real estate advisor states that the rich either made their money in real estate or hold their money in real estate.” (p 141, via Greg Young) When government recovers the rents for natural advantages for everyone, it can save citizens millions. Ben Sevack, Montreal steel manufacturer, tells us (August 12) that Alberta, by leasing oil & gas fields, recovers enough revenue to be the only province in Canada to get by without a sales tax and to levy a flat provincial income tax. While running for re-election, provincial Premier Ralph Klein proposes to abolish their income tax and promises to eliminate medical insurance premiums and use resource revenue to pay for all medical expense for seniors. After all this planned tax-cutting and greater expense, they still expect a large budget surplus. Even places without oil and gas have high site values in their downtowns, and high values in their utility franchises. Recover the values of locations and privileges, displace the harmful taxes on sales, salaries, and structures, then use the revenue to fund basic government and pay residents a dividend, and you have geonomics in action.

a scientific look at how we divvy up the work and the wealth, how some of us end up with too much or too little effort or reward. That’s partly due to Ricardo’s Law of Rent, showing how wasteful use of Earth cuts wages. And it’s partly due to how a society’s elite runs government around like water boys, dishing out subsidies and tax breaks. While geonomists look political reality right in the eye, without blinking, conventional economists flinch. When Paul Volcker, ex-chief of the Federal Reserve, moved on to a cushy professorship at Princeton cum book contract, the crush of deadlines bore down. So Volcker asked a junior associate to help with the book. The guy refused, explaining that giving serious consideration to policy would ruin his academic career. The ex-Fed chief couldn’t believe it and asked the department chair if truly that were the case. That head honcho pondered the question then replied no, not if he only does it once. And economics was AKA political economy!

a new field of study offered in place of economics, as astronomy replaced astrology and chemistry replaced alchemy. Conventional economics, in which GNP can do well while people suffer, is a bit too superstitious for my renaissance upbringing. If I’m to propitiate unseen forces, it won’t be inflation or “the market”; let it be theEgyptian cat goddess. At least then we’d have fewer rats. Meanwhile, believing in reason leads to a new policy, also christened geonomics. That’s the proposal to share (a kind of management, the “nomics” part) the worth of Mother Earth (the “geo” part). If our economies are to work right, people need to see prices that tell the truth. Now taxes and subsidies distort prices, tricking people into squandering the planet. Using land dues and rent dividends instead lets prices be precise, guiding people to get more from less and thereby shrink their workweek. More free time ought to make us happy enough to evolve beyond economics, except when nostalgic for superstition.

more transformation than reform; it’s a step ahead. Harvard economics students this year did petition to change the curriculum, in the wake of the English who caught the dissension from across The Channel. French reformers, who fault conventional economics for conjuring mathematical models of little empirical relevance and being closed to critical and reflective thought, reject this “autism” – or detachment from reality – and dub their offering “post-autistic economics”. Not a bad name, but again, academics define themselves by what they’re not, not by what they are, unlike geonomists. We track rent – the money we spend on the nature we use – and watch it pull all the other economic indicators in its wake. We see economies as part of the ecosystem, similarly following natural patterns and able to self-regulate more so than allowed, once we quit distorting prices. To align people and planet, we’d replace taxes and subsidies with recovering and sharing rents.

not a panacea, but like John Muir said, “pull on any one thing, and find it connected to everything else.” Recall last month’s earthquake in El Salvador. We felt it and its formidable after-shocks in Nicaragua. Immediately afterwards, my host nation, one of the poorest in the Western Hemisphere, sent aid to its Central American neighbor. The Nica newspapers carried photos of the devastation. They showed that the cliff sides that crumbled had had homes built on them while the cliffs left pristine withstood the shock. Could monopoly of good, safe, flat land be pushing people to build on risky, unstable cliffs? If so, that’s just one more good reason to break up land monopoly. What works to break up land monopoly, history shows, is for society to collect the annual rental value of the underlying sites and resources. That’d spur owners to use level land efficiently, so no one would be excluded, forced to resort to cliffs. To prevent another man-induced landslide is yet another reason to spread geonomics.

what you do when you see economies as part of the ecosystem, following feedback loops and storing up energy. Surplus energy – fat or profit – enables us to produce and reproduce. To recycle society’s surplus, the commonwealth, geonomics would replace taxes with land dues (charged to users of sites and resources, in-cluding the EM spectrum, and extra to polluters), and replace subsidies with rent dividends to citizens (a la Alaska’s oil dividend). Without taxes and subsidies to distort them, prices become precise, reflect accurately our costs and values; then, motivated by no more than the bottom line, both producers and consumers make sustainable choices. While no place uses geonomics in its entirety, some places use parts of it, most notably a shift of the property tax off buildings, onto locations. Shifting the property tax drives efficient use of land, in-fills cities, improves the housing stock, makes homes affordable, engenders jobs and investment opportunities, lowers crime, raises civic participation, etc – overall it makes cities more livable. Geonomics – a way to share the bounty of nature and society – is something we can work for locally, globally, and in between.

more transformation than reform; it’s a step ahead. Harvard economics students this year did petition to change the curriculum, in the wake of the English who caught the dissension from across The Channel. French reformers, who fault conventional economics for conjuring mathematical models of little empirical relevance and being closed to critical and reflective thought, reject this “autism” – or detachment from reality – and dub their offering “post-autistic economics”. Not a bad name, but again, academics define themselves by what they’re not, not by what they are, unlike geonomists. We track rent – the money we spend on the nature we use – and watch it pull all the other economic indicators in its wake. We see economies as part and parcel of the ecosystem, similarly following natural patterns and able to self-regulate more so than allowed, once we quit distorting prices. To align people and planet, we’d replace taxes and subsidies with recovering and sharing rents.

a neologism for sharing “rent” or “social surplus” – the money we spend on the nature we use. When we buy land, such as the land beneath a home, we typically pay the wrong person – the homeowner. Instead, since land cost us nothing to make and is the common heritage of us all, rather than pay the owner, we should pay ourselves, our neighbors, our community. That is, we should all pay land dues to the public treasury, then our government would pay us land dividends from this collected revenue. It’s similar to the Alaska oil dividend, almost $2,000 last year. Indeed, the annual rental value of land, oil, all other natural resources, including the broadcast spectrum and other government-granted permits such as corporate charters, totals several trillion dollars each year. It’s so much that some could be spent on basic social services, the rest parceled out as a dividend, as Tom Paine suggested, and taxes (except any on natural rents) could be abolished, as Thomas Jefferson suggested. Were we sharing Earth by sharing her worth, territorial disputes would be fewer, less intense, and more resolvable.